The Complete Story of Debt-Trap Diplomacy

In International Relations, one of the most crucial aspects of a nation-state is to fulfil its national interests. These interests may vary from state to state, but fundamentally all states focus on enhancing their power and position in the global arena. Foreign policies are often in tune with the country’s interests, and one such example is Belt and Road Initiative (BRI), through which China is strengthening its leverage in Asia and Africa. Subsequently, a new concept emerged when Brahma Chellaney, an Indian Academic, came up with the term Debt-Trap Diplomacy in 2017.

Debt-trap diplomacy is a term used to define a creditor nation or establishment extending loans to a borrowing nation in order to expand the lender’s political leverage. This form of diplomacy entails providing projects/loans with too challenging terms for borrowing states to pay back, ultimately forcing them to accept economic or political concessions. Simply put, the debt trap is a position in which someone is forced to overspend on loans in order to pay back their existing debts. Recently, one faction has blamed China for using this strategy to promote its geopolitical interests in Asia and Africa by giving them huge loans and acquiring the assets of the borrowing nations when they fail to repay. The other, however, has portrayed China as an excellent entrepreneur who saw economic opportunity in providing loans to failing countries, generating enormous profits from it — both in terms of money and resources.

The central aim of this article is to examine which side upholds the argument closest to reality. Did China begin its multi-billion Belt and Road Initiative as a master plan to trap poor and needy nations and rip them off their assets and resources? Or is this concept of debt trap just a coincidence that overlapped with China’s efforts to provide financial aid and assistance to developing countries?

Belt and Road Initiative

It all began in 2013 when Chinese President Xi Jinping announced the Belt and Road Initiative (BRI)– a global infrastructure development and investment strategy. Using it as China’s Foreign Policy, President Xi promised various infrastructural projects like building ports, railways, roadways, bridges, dams, and power stations in poor developing countries, especially in Asia and Africa. According to Aid Data, 13 thousand 427 Chinese development projects worth $847 billion are employed in 165 countries worldwide.

A closer analysis of these loans can unearth crucial differences between the Chinese loans and the loans provided by other financial institutions like the World Bank, International Monetary Fund, OECD, etc. The latter offer loans with bona fide, transparent terms and conditions, whereas the former offer under murky contracts, often with clauses of early termination and full repayment of the loans. However, since financial institutions are inter-governmental organisations with nation-states as their members, the terms must be unambiguous and open to all party members. On the other hand, Chinese loans whether concessional or commercial- are provided by the Chinese banks, making China and the borrowing country the only two parties involved. Thus, as long as the terms are comprehensible for the concerned parties, the Chinese banks are not accountable or answerable to anyone who is not directly involved in the contract. Further research demonstrates that of the countries that have taken loans, none has blamed China for hidden or vague terms and conditions, but they have pointed out that Chinese loans are at a much higher interest rate. They have also expressed concerns about the lack of alternatives due to their bad credit rating in the international financial system.

What happened in Sri Lanka?

Sri Lanka was already undergoing political and economic turmoil when the Covid pandemic commenced, followed by an ongoing conflict between Russia and Ukraine. The island nation pleaded for aid and assistance in the global arena. When both the US and India backed off, the Lankan government resorted to China and took enormous development loans. However, this decision became Sri Lanka’s worst mistake. The island nation faced a further increase in debt and dwindling foreign reserves as the projects, funded with Chinese loans, did not make enough money to sustain the economy and the fiscal deficit. As a result, the Chinese company acquired the Lankan port of Hambantota on a lease for 99 years. Nevertheless, this acquisition of a majority stake in the port was more of a cautionary tale and not one we often hear in the international arena.

Interestingly, China accounted for only 10% of Sri Lanka’s debt burden, but the Western media blamed it for 90% of the problems in Sri Lanka. As per the Reuters report, 36.4% of Sri Lanka’s debt is owned by International Sovereign Bonds, followed by the Asian Development Bank (14.3%), Japan (10.9%), and then China (10.8%). Therefore, blaming China solely for Sri Lanka’s outstanding debt would be misdirected. It is necessary to consider that the nation was already under economic turmoil due to pending debts (from other sources) and long-term economic mismanagement before the advent of their deal with China. Thus, to assert that China has some ‘Grand Strategy’ to lend vast sums of loans to developing countries just to acquire their private and public assets when they fail to uphold the terms of the agreement is a far-fetched notion.

The African Case

Even after being a resource-rich continent, Africa didn’t have financial stability and remained underdeveloped throughout its history. One of the significant defining reasons is its lack of an industrial revolution. As a result, post-decolonisation, when newly independent states worked towards growth and development, they faced the problem of insufficient technology, infrastructure, and skills in the continent. The African nations had a vast ‘infrastructural gap’ to tackle, and under these dwindling circumstances, China emerged with its myriad of loans and development projects. China invested around $145 billion in total from 2000 to 2018, working on nearly 70 projects per year since 2010. Around 66% of these projects were either in the transport or energy sector, giving a developmental boost to the African nations. It was a smooth ride till Africa maintained a positive trade balance; however, with time, these nations started losing money as Chinese projects stopped generating additional revenues. Slowly imports replaced exports leading to a lousy trade deficit in many African countries.

Post-pandemic, the situation worsened. China was the biggest creditor to 32 African nations, amongst which 18 requested China to renegotiate the terms and 12 to restructure the loans and repayments. Surprisingly, even though many states have a colossal debt burden under China, they still consider the Asian Giant their closest friend. Nations like Kenya and Comoros said that Africa’s only trap is ‘Poverty and Underdevelopment’ and often state China as the biggest supporter of their growth in the past decade. China, too, has shown some mercy on the continent by providing a moratorium to many countries, including Angola, Chad, the Republic of Congo, Mauritania, Sudan, Zambia, etc. Furthermore, accepting their requests, China gave a 6-months covid relief on repayments to 25 countries and waived off approximately $9.8 billion of debt to other nations, including Cuba, Sudan, Zimbabwe, Pakistan, and Cambodia.

Is it really Debt Trap or Anything Else?

Calling it a debt trap may be wrong, but China did choose its borrowers strategically. It stepped in at the most opportunistic moment and gave the best deals to its handpicked targets. Most countries did not have a good credit rating and thus were ineligible to seek help from other alternative sources of external finance. In such a situation, China protected its interests by holding project assets as collateral. The Chinese Exim Bank, through ‘Resource Guarantee Infrastructure Financing’, focused mainly on mineral and hydrocarbon-rich African states to leverage the extraction of natural resources against defaults on loans. For instance, it extracted Copper from Zambia, Gold from Tanzania, and Oil & Gas from Sudan. This strategy can be termed China’s safety net, but not its Policy. Moreover, China proved helpful in quite a few cases – it assisted in developing many African Countries, helped Pakistan with its perennial power shortages, boosted communication and energy sectors and developed transport channels throughout Asia and Africa. Therefore, though China may have exacerbated, it did not cause the problem, whose roots lay in the borrowing countries’ broken politics and economic mismanagement. 

Role and Lessons for India

PM Narendra Modi once said, “History has taught us that in the name of development partnerships, nations were forced into dependence partnerships. It gave rise to colonial and imperial rule. It gave rise to global power blocks.” Although China waived off several loans in the African country, it was reluctant to do the same in other parts of the world. This can be attributed to the fact that African nations do not provide any immediate geostrategic advantage to Beijing compared to other parts of the world, especially in South Asia. With the Indian Ocean and Indo-Pacific in the picture, Beijing will not leave any chance to capitalise on opportunities that can enhance its presence, influence and leverage in the region. Plotting the countries where China has shown a strict hand regarding loans, one will find countries in the Horn of Africa, Eastern Africa, South Asia and South East Asia, covering India and the Indian Ocean from all sides. China calls this a mere coincidence, but India should be cautious of the activities China does in these countries as they can be strategically utilised during war and aggression.

Way Forward

It is a mixed picture but worrisome, nevertheless. On the one hand, we cannot deny the existence of the propaganda around the ‘China Debt Trap’, which emerged as a powerful weapon of geopolitical strategy. On the other hand, China is slowly increasing its presence globally through its strategically planned loans. However, the absence of any other alternatives for the developing countries has to be blamed on the West. Rather than criticising and asking nations not to seek financial assistance from the Asian Giant, the US should counter China by providing a ‘New International Financial Framework’, where developed countries come together to support poor and developing countries.

[Header image by Lommes, CC BY-SA 4.0, via Wikimedia Commons]

Rahul Ajnoti is pursuing his Master’s in Politics and International Relations from Pondicherry University. His areas of interest are India’s Foreign Policy, South Asia, and European Studies. The views and opinions expressed in this article are those of the author.

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